Transactions of sale of shares of a closely held company can be construed as transfer of land and short term capital gain is chargeable

Bhoruka Engineering Inds. Ltd. Vs DCIT (ITAT Bangalore)-  The whole transaction has been arranged in a sequential manner with M/s. Bhoruka Steel Ltd selling its landed property to BFSL for a nominal value of Rs. 3.75 crores ; BFSL never before doing any business other than financial services purchases the land for Rs. 3.75 crores ; immediately thereafter the assessee company and its entire group holding 98.73% of shares in BFSL selling the share holding to DLF­CDL for a consideration of Rs.  89,28,36,500/- without attracting any levy of taxation.

This episode has been made possible by getting away from Bangalore Stock Exchange and going to Magadh Stock Exchange to carry out the sale transaction of shares and by paying STT for claiming exemption from long-term capital gains arising on sale of shares u/s. 10(38) of the IT Act, 1961. The assessee company and its group have on the face of it sold their share holding in BFSL, but in fact, sold land itself to DLF-CDL and at the same time giving a colour of exempted long-term capital gains against the short-term capital gains arising on the transfer of the landed property. In the facts and circumstances of the case, we find that this is a clear case of colourable device to evade payment of taxation on short-term capital gains. By selling the shares to DLF-CDL, the assessee company and its associates have in fact sold the assets and properties of BFSL which included the land as well, which if sold in the normal course, would be answerable to levy of short-term capital gains taxation.

Bhoruka Engineering Inds. Ltd.

Vs

Deputy Commissioner of Income Tax

Decided By- ITAT Bangalore

Decided on 10.02.2011

I.T.A No. 1139/Bang/2010

(Assessment Year : 2006- 07)

O R D E R

PER DR. O. K. NARAYANAN, VICE PRESIDENT :

This appeal is filed by the assessee. The relevant assessment year is 2006-07. The appeal is directed against the order of the Commissioner of Income-tax (A)-I, at Bangalore, dated. 17.08.2010. The appeal arises out of the assessment completed u/s. 143(3) of the IT Act, 1961.

2. The assessee company, M/s. Bhoruka Engineering India Ltd., (hereinafter mentioned as BEIL) is engaged in the business of finance and investments. The assessee company had invested in M/s. Bhoruka Financial Services Ltd., (hereinafter mentioned as BFSL) by holding 45,350 shares of Rs. .20/- each. In the previous year relevant to the assessment year under appeal, in August, 2005, the assessee company sold the above holding of 45,350 shares to M/s. DLF Commercial Developers Ltd., (hereinafter mentioned as DLF-CDL), which is a subsidiary of M/s. DLF Universal Ltd., The sale was made for a consideration of Rs. .20,29,08,626/- at the rate of Rs.  4,490/- per share. The assessee company thereby earned capital gains of Rs.  20,25,49,549/-. The capital gains were long term capital gains as the assessee company was holding the shares for a period of more than one year. The assessee company claimed exemption from taxation for the above sum of long term capital gains on the ground that the sales were made through a Stock Exchange and Security Transaction Tax (STT) was paid as provided u/s. 10(3 8) of the Income-tax Act, 1961.

3. However, the Assessing Officer was not inclined to grant exemption to the long term capital gains as claimed by the assessee company for various reasons detailed in the assessment order. The Assessing Officer found that the assessee and BFSL belonged to Shri. S. N. Agarwal and his family members known as Bhoruka group. BFSL, whose shares were sold by the assessee company even though existed for a long period, did not carry on any business other than the business of financial investments of the group. But in the previous year relevant to the assessment year under appeal, BFSL acquired land for Rs.  3.75 crores from M/s. Bhoruka Steels Ltd., which is another company of Bhoruka group. The land value appears in the balance sheet of BFSL at Rs. 4.21 crores as on 3 1.3.2005 which included development expenses as well. The promoters of BFSL held 1,98,850 equity shares and 2,550 shares alone were held by public shareholders.

4. The Assessing Officer further found that even though BFSL is a listed company with Bangalore Stock Exchange, but the sale was made on the floor of Magadh Stock Exchange. Bangalore Stock Exchange declined to deal with the share transaction of BFSL for reasons according to the assessee communicated orally and not through any written communication. On the above basis, the assessee approached Magadh Stock Exchange and got the shares sold and transferred to DLF-CDL. The Assessing Officer further held that Magadh Stock Exchange was not permitted by Securities Exchange Board of India (SEBI) to trade in shares as the said Stock Exchange had not complied with the conditions laid down by SEBI for granting recognition to the said Exchange. The permission was later granted to Magadh Stock Exchange after it paid penalty to SEBI, when the case was determined by the Hon’ble Supreme Court. It is the case of the assessing authority that the transaction carried out with the help of Magadh Stock Exchange which at that point of time was not permitted to deal in shares was a clear indication to show that the share transaction made by the assessee was only a colourable device and in fact, what the assessee had sold and transferred to DLF-CDL was a landed property of 15 acres purchased by BFSL in the previous year relevant to the assessment year under appeal. The Assessing Officer held that the property was purchased by BFSL in the previous year relevant to the assessment year under appeal and has held that property for a period of less than one year when the shares were sold and in that way the said property was a short term capital asset in the hands of BFSL. If BFSL had sold the land as such, to DLF-CDL, BFSL would have been liable to pay short term capital gains tax which affects not only the said company, but the whole of Bhoruka group to which the assessee company also belonged. It would have also been necessary on the part of DLF-CDL to incur registration charges on the purchase of land from BFSL if the land was purchased as such. In order to over come the above stated tax and financial liabilities, the assessee group made such a colour able device that instead of BFSL directly selling the landed property to DLF-CDL, the Bhoruka Group including the assessee company sold its shares to DLF-CDL through which the landed property has itself been transferred to DLF-CDL. Having come to a conclusion that the entire transaction was in the nature of a colourable device, the assessing authority applied the ratio laid down by the Supreme Court in McDowell’s case (1985) 154 ITR 148 and held that as the surplus capital gains arising to the assessee company should be treated as a surplus arising on account of the sale of short-term capital asset in the nature of landed properties and as such the assessee is liable for short-term capital gains taxation.

5. Accordingly, the assessing authority treated the surplus capital gains of Rs.  20,25,49,549/- as short-term capital gains taxable in the hands of the assessee as against the exemption claimed by it. In first appeal this was confirmed by the Commissioner of Income-tax(A). The assessee is aggrieved and therefore the second appeal before us.

6. The grounds raised by the assessee company in the present appeal read as below :

i) On the facts and in the circumstances of the case, the Commissioner of Income-tax(A) erred in upholding the decision of the assessing authority in determination of short term capital gains of Rs.  20,25,49,549/- and including for taxation in the case of the appellant.

ii) The learned Commissioner (A) ought to have appreciated that the transaction in shares of BFSL held by the appellant with DLF Commercial Developers Ltd., (DLFCDL) was genuine and the appellant having paid Securities Transaction Tax, the capital gains exempted from taxation u/s.10(38) of the Act.

iii) The learned Commissioner (A) ought to have appreciated that the transaction of the appellant was legal and consequently it has no tax liability under the Act in respect of the said transaction and accordingly he ought to have refrained from upholding the impugned addition of the assessing authority which was made only on surmises.

iv) The learned Commissioner (A) in his perverse order held that the ratio of the Hon ‘ble Supreme Court judgement in McDowell’s case would apply, whereas the Supreme Court had already explained in the case of Union of India and Another v. Azadi Bachao Andolan and Another reported in (2003) 263 ITR 706 (SC) and also recent judgement of the Supreme Court in the case of Commissioner of Income-tax v. Walfort Share & Stock Brokers Ltd reported in 326 ITR 1 (SC) had explained the import of the decision of the Supreme Court in McDowell’s and consequently the transaction of the appellant being genuine, the short term capital gains as computed by the learned assessing authority was liable to be deleted.

v) The surmise of the learned Commissioner (A) is very evident from his observations that the appellant had deliberately and consciously adopted a colour able device to get rid of the capital gains tax and also in the mis­statement of fact like that the appellant was not allowed t0 transact in the Bangalore Stock Exchange and but for Magadh Stock Exchange the appellant would not have been successfully in carrying out its transaction and the conclusion drawn by him was purely on surmises and consequently the impugned addition as sustained by him is liable to be deleted.

vi) Without prejudice the learned Commissioner (A) ought to have appreciated that BFSL being a limited company which was the owner of the land, even the transaction was held to be transfer of land for consideration the capital gains was required to be assessed only in the hands of the company namely BFSL and even on this ground the impugned addition in the hands of the appellant was opposed to law and liable to be deleted.

vii) Without prejudice, the addition is arbitrary, unreasonable, and excessive and ought to be deleted.

viii) The learned Commissioner (A) erred in confirming the interest u/s.234B and 234D of the Act.

7. We heard Shri. S. Parthasarathi, the learned Advocate appearing for the assessee company. The learned counsel contended that the assessee company, i.e., BEIL was holding the shares in BFSL since long. BFSL purchased the landed property from another group company M/s. Bhoruka Steels Ltd., only in the previous year relevant to the assessment year under appeal. The purchase of landed property made by BFSL is an entirely different transaction with which the assessee had nothing to do with. The assessee is only a shareholder. The property was purchased by BFSL in its own name and under its own authority and by using its own funds. The assessee, BEIL, BFSL, DLD-CDL are all lawfully established corporate entities different and distinct from each other and therefore the transaction carried out by BFSL cannot be construed as a transaction in the hands of BEIL. What the assessee- BEIL sold to DLF-CDL was its shares in the capital of BFSL and not any landed property. For that matter the assessee BEIL does not have such landed property to be sold. In these circumstances, all the findings made by the assessing authority are based only on surmises and far fetched imagination.

8. The learned counsel argued that there is no colouring of any transaction in the present case as every transaction is transparent. BFSL had purchased landed property in the previous year relevant to the assessment year under appeal. That is not a transaction with which the assessee BEIL had any connection. The decision of BEIL to sell its shares in BFSL to DLF-CDL is another independent transaction nothing to do with purchase and sale of immovable properties. The case of the assessing authority is that the surplus arising in the hands of the assessee is short-term capital gains on the ground that what was sold by the assessee is land and not shares. There is no basis for such a finding at all. The assessee company never owned such a piece of land. Therefore, there is no question of the assessee selling the land to DLF-CDL and earning short-term capital gains liable for taxation.

9. The learned counsel distinguished the facts of the present case from that of the decision of the Honourable Supreme Court in the case of Mc Dowell & Co. v. CTO (154 ITR 148) and placed heavy reliance on the judgements of the Honourable Supreme Court rendered in the cases of Union of India and Another Vs Azadi Bachao Andolan and Another (263 ITR 706) and Commissioner of Income Tax Vs Walfort Share & Stock Brokers Ltd., (326 ITR 1).

10. Shri. G. V. Gopala Rao, the learned Commissioner of Income-tax appearing for the Revenue on the other hand contended that the only asset owned by BFSL was the landed property purchased in the previous year relevant to the assessment year under appeal and by transferring the entire shares of BFSL in favour of DFL-CDL by way of sale, virtually the landed property itself has been sold and the sale and transfer of shares were only a colourable medium to escape from the liability of short-term capital gains taxation.

11. The learned Commissioner of Income-tax argued that even though BFSL is a company listed in the Bangalore Stock Exchange, the transaction of the sale of its shares by the assessee company and its group associates were carried out in Magadh Stock Exchange and the assessee has not stated any convincing reasons for such a switch over from Bangalore to Bihar. Magadh Stock Exchange was not permitted at that point of time to deal in share transactions. The assessee wanted an avenue to make way for paying Security Transaction Tax (STT) so that the assessee could make its claim of exemption u/s. 10(3 8) of the IT Act, 1961. The assessee company has used dubious methods to take the transactions to Magadh Stock Exchange instead of Bangalore Stock Exchange and that too only for the purpose of availing the benefit of exemption provided u/s. 10(3 8) for payment of STT. It is for this reason the learned Commissioner argued that the Revenue is highly relying on the judgement of the Honourable Supreme Court rendered in the case of McDowell & Co., (154 ITR 148) for the finding of the assessing authority that the entire transaction was a colour able device. He, therefore, submitted that the appeal filed by the assessee may be dismissed.

12. We heard both sides in detail and considered the matter carefully. The assessee company BEIL, other company – BFSL, Bhoruka Steels Ltd., are all closely held group companies owned by Agarwal group. Even though BEIL, BFSL and Bhoruka Steels Ltd are different corporate entities for the purpose of Companies Act, they are all controlled by the same interest group of Agarwal family as common shareholders which is very prominent in the entire course of transaction involved in the present appeal. The assessee company along with the individuals belonging to the Agarwal group had entered into an agreement on 20.07.2005 with DLF-CDL to sell the shares in BFSL to that company, DLF-CDL. As per the agreement itself, the assessee, its group of individuals together held 1,88,850 equity shares representing 98.73% of fully paid-up equity capital of BFSL. Facts speak for themselves. When the assessee and its group associates along with the concerned individuals of the same group held 98.73% of the shares in BFSL, it means without any contradiction that the assessee along with its group owned all the assets and properties of BFSL even though those assets and properties are technically held in the name of BFSL as an independent corporate entity. Once this corporate veil is pierced, which is within the powers of the Revenue Authorities, we find that the properties and assets of BFSL were held and de facto owned by the assessee company and its group. BFSL, a company since long in existence was engaged only in financial services relating to the investments of assessee group. The property was purchased from another associate concern Bhoruka Steels Ltd., for a consideration of Rs.  3.75 crores. This property purchased for Rs.  3.75 crores has become substantially the property of DLF-CDL when 98.73% in BFSL were transferred to DLF-CDL on sale. DLF-CDL, which is a real estate company, by purchasing 98.73% of shares in BFSL has in fact acquired the ownership and possession of the landed property which was purchased by BFSL for an amount of Rs. 3.75 crores just a few months back. DLF-CDL has acquired the shares of BFSL for a consideration of Rs. 89,28,36,500/-. The substance of the transaction is apparent now. Bhoruka Steels Ltd., sells its landed property to its associate concern BFSL for a consideration of Rs. 3.75 crores and immediately thereafter the shares in BFSL are sold and transferred to DLF-CDL for a consideration of more than Rs. 89 crores. If the formalities of the transactions and the legal nature of the corporate bodies are ignored for a moment, the stark fact coming to surface is that the assessee’s group has sold the property belonging to one of its concern to DLF-CDL for a consideration of more than Rs. 89 crores through the medium of sale and transfer of shares which property was purchased for Rs. 3.75 crores and thereby made attempt to avoid payment of short-term capital gains tax. If this is not a colour able device, then what would be a colour able device ? The only property held by BFSL was the landed property which was acquired by it for a lesser amount of Rs. 3.75 crores from its own associate concern which has been transferred to DLF-CDL through the medium of sale of shares for a huge sum of Rs. 89,28,36,500/-.

13. Therefore, we have to see that the series of transactions were well planned scheme so as to transfer valuable landed properties to DLF-CDL without attracting corresponding liability of tax. The whole transaction has been arranged in a sequential manner with M/s. Bhoruka Steel Ltd selling its landed property to BFSL for a nominal value of Rs. 3.75 crores ; BFSL never before doing any business other than financial services purchases the land for Rs. 3.75 crores ; immediately thereafter the assessee company and its entire group holding 98.73% of shares in BFSL selling the share holding to DLF­CDL for a consideration of Rs. 89,28,36,500/- without attracting any levy of taxation. This episode has been made possible by getting away from Bangalore Stock Exchange and going to Magadh Stock Exchange to carry out the sale transaction of shares and by paying STT for claiming exemption from long-term capital gains arising on sale of shares u/s. 10(38) of the IT Act, 1961.

14. The assessee company and its group have on the face of it sold their share holding in BFSL, but in fact, sold land itself to DLF-CDL and at the same time giving a colour of exempted long-term capital gains against the short-term capital gains arising on the transfer of the landed property.

15. In the facts and circumstances of the case, we find that this is a clear case of colour able device to evade payment of taxation on short-term capital gains. By selling the shares to DLF-CDL, the assessee company and its associates have in fact sold the assets and properties of BFSL which included the land as well, which if sold in the normal course, would be answerable to levy of short-term capital gains taxation.

16. The facts and details of the case and the circumstances are very well explained in the assessment order and in the order of the Commissioner of Income-tax(A). We are not reciting those facts and details except where it is very essential, for fear of repetition. But on the basis of our findings arrived at in the above paragraphs, we hold that the Commissioner of Income-tax(A) has rightly treated the surplus arising on the sale of shares as short term capital gains liable for taxation. The Commissioner of Income-tax(A) is justified in upholding the said assessment order.